NEW YORK (REUTERS) - US banks exposed to energy-related loans will need to set aside even more money than previously expected to cover potential losses as oil prices near 12-year lows.
Earlier on Wednesday (Jan 13), BOK Financial Corp became the third US bank over the past month to increase its cushion for energy loans, and analysts said there was more to come as earnings season kicks off this week.
"It's going to get worse before it gets better," said Michael Rose, an analyst at financial services firm Raymond James Financial Inc.
BOK, which primarily operates in Oklahoma and Texas, expects loan loss provisions for the fourth quarter to increase to US$22.5 million (S$32.3 million), nearly four-times the midpoint of the US$3.5 million to US$8.5 million it forecast earlier.
Associated Banc-Corp said on Jan 8 it would set aside an additional US$13 million for bad loans, while Hancock Holding Co upped its allowance by US$42 million Dec 17.
For the largest US banks such as JPMorgan Chase & Co which reports earnings on Thursday, and Wells Fargo & Co which reports Friday, energy-related exposure is in the low single digits as a percentage of total loans. Still, analysts and investors will be listening closely to what these banks have to say about the energy sector.
Meanwhile, some regional banks have much more concentrated exposure. Energy loans at BOK Financial, for example, account for 18 per cent of the total portfolio.
Raymond James analyst Mr Rose ultimately sees value in several banks heavily exposed to energy as he said loans to the industry are more conservatively underwritten than other types of loans. He said he is more concerned about commercial and residential real estate loans made in communities where many jobs are tied to the energy sector than he is about the energy loans themselves. Even so, Mr Rose said regional banks with heavy energy exposure will weather the downturn.
"I think we're setting up for a tremendous buying opportunity in a lot of these names because these banks are not going to lose money," he said.
Raymond James energy analysts are forecasting oil prices at US$60 by year-end. However, analysts at Goldman Sachs have said oil could fall to US$20 a barrel. Oil prices are currently at roughly US$30 per barrel.
The extended downturn for oil has market watchers paying ever closer attention to banks that lend to energy companies. "Everybody was hoping for a bounce through most of last year and it hasn't materialised so I think both the regulators and the auditors are going to be taking a much harder look at these credits," said Christopher Whalen, credit analyst at Kroll Bond Rating Agency.
